From 1 January 2026, lenders cannot levy pre-payment or foreclosure charges on floating-rate loans to individuals for non-business purposes — no lock-in, regardless of fund source. (RBI/2025-26/64, dated July 2, 2025.) It applies to all commercial banks (excluding payments banks). Effective: All loans/advances sanctioned or renewed on or after January 1, 2026.
This is a major shift for any floating-rate LAP book, because it removes a revenue line and makes it frictionless for borrowers to refinance away. RBI consolidated a patchwork of older foreclosure-charge circulars into a single set of Directions, partly to stop restrictive clauses that locked borrowers in.
The core rule: on all floating-rate loans and advances, for loans to individuals for purposes other than business — with or without co-obligants — the lender shall not levy any pre-payment charges. This is absolute: it applies regardless of the source of funds used to prepay, whether part or full, and with no minimum lock-in period. A LAP taken by an individual for a personal (non-business) purpose on a floating rate therefore carries zero foreclosure cost.
For loans to individuals and Micro & Small Enterprises for business purposes, the treatment is tiered. Large commercial banks, Tier-4 Urban Co-operative Banks, NBFC-Upper Layer and All India Financial Institutions cannot levy pre-payment charges at all. Small Finance Banks, RRBs, Tier-3 UCBs, State/Central Co-operative Banks and NBFC-Middle Layer cannot levy them on sanctioned limits up to ₹50 lakh. For dual or special-rate loans, what matters is whether the loan is on a floating rate at the moment of pre-payment.
Disclosure is mandatory: the applicability of pre-payment charges must be stated in the sanction letter, the loan agreement and the KFS, and nothing undisclosed can be charged. Lenders cannot reinstate charges they earlier waived, and cannot levy charges where the pre-payment is at the lender's own instance. The Directions apply to loans sanctioned or renewed on or after 1 January 2026 and repeal the older home-loan foreclosure circulars. For LAP pricing teams, the work is re-modelling yield assumptions and rewriting sanction-letter and KFS language before the January 2026 cutover.
If taken by an individual for a non-business purpose on a floating rate, yes — no pre-payment charges at all from 1 January 2026, with no lock-in and regardless of how the borrower funds the prepayment.
It is tiered. Large banks, Tier-4 UCBs, NBFC-UL and AIFIs charge nothing; SFBs, RRBs, Tier-3 UCBs, co-op banks and NBFC-ML charge nothing up to ₹50 lakh sanctioned.
The no-charge rule targets floating-rate loans. For dual/special-rate loans, the test is whether the loan is on a floating rate at the moment of pre-payment.
Loans sanctioned or renewed on or after 1 January 2026. It also repeals the earlier home-loan foreclosure-charge circulars.
No. Applicability must be in the sanction letter, loan agreement and KFS. Undisclosed pre-payment charges cannot be levied, and waived charges cannot be reinstated.